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Analysts at Capital Economics argue that despite the recent recovery of the EUR/USD pair, they still expect the euro to weaken further against the US dollar later this year. They expect the rebound in the euro to be short-lived.  

Key Quotes:

“We think that the fast rate of vaccination, falling virus case numbers and an earlier lifting of restrictions in the US will continue to put greater upward pressure on government bond yields there than in the euro-zone.”

“The ECB has expressed a greater willingness than the Fed to push back on rising government bond yields.”

“We think the combination of more upward pressure on yields from a stronger economic recovery and less downward pressure on yields from monetary policy should widen the yield gap in favour of the dollar this year, a pattern we have seen a few times over the past decade.”

“The latest data show that speculative positioning for the euro has not yet fully normalized from the extreme level reached at the end of last year. While net long positioning in the euro is no guarantee of further decline, it implies that there is scope for further downside if positioning in the currency pair normalizes – or even overshoots – to reflect the divergence in bond yields noted above.”

 

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